Interview with Kalibrate: “Fuel retailers need to prepare for uncertainty”

We speak to Tom Hatton, Head of Product Management at Kalibrate, about trends in fuel pricing, expectations for retailers and consumers, the challenge around pricing EV charging, and how uncertainty is king.

What are the main trends around fuel pricing after this difficult year?

The pandemic has been pretty dominating in terms of its influence. The knock-on effect on fuel has been dramatic. We are still expecting global fuel demand to peak some time in the future. I think it's even 2027 that they're saying now. The date is heavily offset by India and China and the demand growth there. What we are seeing in North America and throughout Europe is a bit of a relaxation in demand. Particularly, you've got EV adoption, white collar commuting is completely dropping, and it's pretty unlikely that we will see fuel levels return to pre-pandemic levels.

What that means for pricing teams is a heavy focus on margin. People are looking for ways to protect their brand value. For example, not using zeros to really keep that background perception down, and using minimum price points. The gap is closing between the bottom and the top of the market, so those guys that were a bit more aggressive on price, trying to get that little edge, they're now pricing far closer to the guys above them. For the consumer there are less opportunities to find a good deal on a per litre basis. With oil prices climbing too, fuel prices are climbing to levels that haven't really been seen in over ten years.

Uncertainty continues to be the theme really but as a consumer, even if oil prices drop, I would not be expecting to see prices falling back too far. Uncertainty is what fuel retailers need to prepare for and I would anticipate that that's going to continue for quite some time.

How does a company like Kalibrate adapt to a market with this uncertainty and a heavy focus on margins?

The Kalibrate platform has been evolving now for almost thirty years, so it's become a strong suite of tools that help pricing teams in any scenario. Fuel pricing is something you need to decide every single day — if you've had a marketing spend in a certain area, or you got a heavy volume drop in another area, you need to have pricing rules in place to address the issue at hand. Kalibrate will have a pricing rule to handle a situation that will help you through it. We've seen a significant climb in demand for data insights, so our client’s pricing teams are looking to make informed decisions on pricing. Historically there's been a tendency to use experience and gut feel, now we are seeing people starting to be more influenced by data-driven decision-making.

Looking at today's market, what are the basic principles around fuel pricing for your average retailer?

Supply-demand are your ultimate two. You've got regulatory which are underpinning — there are certain countries where you can't lift your price above a ceiling or you can only do one price change per day. In restorative markets you might only be able to do your restoration behaviour a certain number of times a week or on a particular day of the week. I'm thinking of Germany. Ultimately the answer to this question depends on location. Everywhere across the board they are looking to increase unit margin. I would say there's also been a shift towards using optimisation — in Kalibrate terms that's mathematical price automation. That's been a good way to look for this extra unit margin without dropping too much in the way of volume.

Included in that strategy is your competitor's price. How big of a role does that play in the decision-making process?

In terms of strategy setting, it's pretty much paramount to determining where you're going to sit as a brand. You need to know if you're a premium or budget brand, and your competitor’s prices are a very material component in that equation. In terms of the actual pricing decisions on a day-to-day basis, it is just one factor. We see a strong correlation between the price difference to a competitor's site, and the demand on our own site. And the strength of that elasticity can change depending on lots of factors — how strong your offering is, your location and your actual brand. When using optimisation, you can let the system do the talking but you should certainly be using the competitor price as a guide to be able to ensure that you're maintaining your brand position.

Stations now have more services and ways to connect to consumers — loyalty schemes, their favourite restaurant, etc. But we do see that price continues to be the biggest factor when visiting a site. Are we close to a tipping point where price will no longer be the number one reason to visit a site?

I don't think price will ever be an insignificant factor in terms of the consumer's choice. Demand is growing again; fuel is representing a higher proportion of a family's budget each week. As commuting starts to return, families will need to minimise the cost of that commute. So I think that price will continue to be a dominating theme way beyond 2021. However, loyalty and other revenue lines are definitely becoming far more significant to the retailer.

EV car sales and government policies that are helping to push down gasoline and diesel sales are also a significant influence. And that's an area that we're working on — how we can assist retailers to optimise profit across revenue lines. The way EV charging will be priced has not been fully determined yet and retailers want to maintain their brand level. 59% of consumers said they would spend additionally during an EV charge, so even in a world where we have EV sales instead of fossil fuel sales, the consumer is still going to have that choice.

Earlier this year Kalibrate launched the ‘Electric Opportunity’ research. As a price system provider, what is the role of Kalibrate in EV adaptation and how will those prices be managed? Do you see prices changing throughout the day depending on grid consumption?

The EV concept has not been fully defined yet, so there is a huge amount of uncertainty. Where Kalibrate can help at the moment is by getting the prices out to the stations, we can continue to operate optimisation models that looks at competitor prices, to use demand and then to optimise based on the difference to competition with profitability of EV sales as the primary goal. But really it’s about ensuring that the location itself is as profitable as possible regardless of the revenue line.

Kalibrate is an international company with clients in many countries. I guess that the liberalization of fuel prices is something that you look at. Are there any markets that you see with special interest right now?

Asia has been an interesting area for sure and that's an area we'll be putting a lot of focus into from both the location and intelligence side of our business. People are looking for where they can make these investment choices, where to build stations. To name two countries: India and China have been at the front of this activity, and we are supporting clients in both of those places. South America, Brazil, namely, has been particularly interesting. Generally speaking, we've also had an uptake in enquiries from retailers in countries that you wouldn't expect that are looking to adopt AI and machine learning tactics and bring these insights into their organisation. Russia is a good example of a country where we've seen some activity recently where we've been supporting with machine learning.

Interview by Oscar Smith Diamante

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